The Paulson Bailout Bill and the Need for Leadership

In case it wasn’t clear from earlier posts, our position on today’s bailout bill can be summarized as follows: the bailout is neither a complete nor a perfect solution, but it is better than the original proposal of ten days ago, and it is a valuable first step toward restoring confidence in the markets. This morning when the Dow fell 200 points shortly after opening, there were news stories speculating that the markets were not happy with the bailout plan; well, we saw this afternoon what the markets really thought about the bailout.

So if the professional investors who manage most of our money wanted the bailout, what happened? The free-market libertarians were opposed to the bill on supposedly fundamental grounds, but they were not enough to vote it down. The bill failed because enough representatives did not want to go home to their reelection campaigns having voted for a widely unpopular bailout bill. And why is it unpopular? Because no one took the time to educate the public on what the crisis means, how the bailout would operate, what the potential costs of inaction would be, what is happening to the money, and so on. These are complicated issues, but in the absence of explanation the public (based on the “man on the street” interviews” I heard on the radio today) focused on a few simplistic ideas: that this is a bailout for rich Wall Street bankers; that the $700 billion (at least) is a complete loss for the taxpayer; that the current administration cannot be trusted; and so on.

Perhaps there was not time in the last ten days for this type of education. But this only points out the importance of planning ahead. By repeating that the economy was “fundamentally sound” until suddenly discovering that it wasn’t, Bush, Paulson, and Bernanke lost the opportunity to prepare the ground for major government intervention in the economy. This bill will almost certainly be renegotiated and brought to another vote. But the underlying lesson is that intervention on the scale we are talking about requires political legitimacy, and that legitimacy requires the willingness to explain to the public just what is going on and why it matters to them.

3 thoughts on “The Paulson Bailout Bill and the Need for Leadership

  1. Education seems to have been the key component missing from today’s vote on the bailout plan, since lawmakers were not convinced of the necessity/timeliness of the plan. How do you think Paulson and Bernanke will react in the coming days to further impress upon Congress the necessity of a government solution? What is your reaction to the politics of the decision to reject the bailout? How can Congress and the Treasury and the Fed work together in the future to WISELY use taxpayer dollars to solve this crisis?

  2. Popular education about tough policy decisions starts, of course, with the President and in this case Bush is so unpopular as to be a pathetic, whiny messenger. But Bush’s inability to play President is not just about his lack of credibility; it is also about his anti-intellectualism and anti-historicism, and his elite detachment. The public didn’t need to be educated about energy independence or Islamist complexity after 9/11. The public needn’t be worried about America’s plummeting approval among foreign populations or the long-term harms to our economy of our declining foreign student population. So why should people need to know about CDO tranches or how the Resolution Trust Corp worked out? This from the first MBA president, and just when you thought his legacy couldn’t be darker…

  3. I agree that one of the problems was that the administration has exhausted its credibility with a large portion of the American public. Several commentators drew an analogy between the rescue plan and the run-up to the Iraq war. I think his analogy is misleading on some fronts, but the fact remains that it was compelling to many, not least because of the coincidence that $700 billion is roughly the cost of the Iraq war to this point. At this point I think that the best form of education would be for the presidential candidates to tackle the issue, because they are the people who are being listened to these days. It is also increasingly clear that the financial crisis and any repercussions it has for the real economy will be among the most serious issues for the next administration.

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